Affordable Housing Institute : US

In many previous posts I’ve alluded favorably to the concept of inclusionary zoning. As one of the two truly innovative affordable housing resources invented in the last thirty years (the other being investment tax credits, the purest and most effective expression of soft equity), it deserves its own exposition, using as a case study a recent laudatory New York Times article on New York City’s multi-pronged efforts to use inclusionary zoning and its ilk as production drivers.

 

It seems counterintuitive, but the luxury real estate market is helping to build housing for low- and moderate-income people.

 

Sister Joan Kirby, Sister Margaret Coakley and Sister Kathleen Cox share an apartment in this West 52nd Street tenement building, renovated in part with funds from developers of a tower on West 43rd Street. They were evicted from their previous home when the nun named on the lease moved.

 

Saving nuns from eviction: who could possibly be against that?

 

A.What it is

Conceptually, inclusionary zoning is a trade of entitlement permission for affordability in kind. A parcel of land (usually greenfield) requires zoning approval before it can be developed, so the locality imposes an algorithmic administrative process that extracts, as the price of approval, not payment in cash but delivery of an in-kind benefit: affordable housing.

 

Inclusionary zoning

A metropolitan or local authority schema whereby a locality makes the following bargain with participating developers:

· Zoning approval for residential development on land within its jurisdiction. (Also includes density bonuses or other up-zoning entitlements in exchange for affordability.)

· Affordable set-aside, with some of the homes reserved as affordable according to the locality’s definition. (Percentage reservation, affordability definition and level, and permissible tenures are all customizable elements established by the locality.)

While most inclusionary zoning is a local or metropolitan initiative, in some cases it is imposed by the state, which in effect ‘crams down’ an affordability mandate on its localities by allowing developers to override local zoning restrictions if they meet the state’s inclusionary-zoning affordability requirements. The granddaddy of state-level inclusionary zoning statutes is Massachusetts‘ Chapter 40B (originally Chapter 774).

In its basic bargain inclusionary zoning is kin to linkage, Community Preservation Trusts, redevelopment areas (RDAs), and the proposed (but not enacted) GSE half-tithing proposal. All are part of the phylum of dedicated evergreen funding streams.

“Nobody misses a slice off a cut loaf …”

 

B. How it works

In economic terms, inclusionary zoning is a tax upon development rights, assessed against the increase in value between (1) undeveloped and unzoned land, and (2) that same land still undeveloped but now zoned. [Zoning is destiny.]

 

Rather than being cash, it’s paid in-kind – taken in the form of housing affordability or ongoing price/ rent bargain. Being in-kind is not a bug, it’s a feature — and one with curious, unexpected, but meaningful benefits.

 

There’s a further variant: linkage, which essentially creates a secondary (resale) market in zoning permissions and affordability mandates — and because markets always clear, issuance of zoning scrip travels with breathtaking rapidity from those who have it to those who need it to build. So New York City combines them all in an ecosystemically diversified mix:

 

Inclusionary zoning [is] one of several city programs that provide incentives for market-rate developers to contribute to the inventory of affordable housing. They can:

· Buy extra space for their buildings from affordable housing developers [transferable linkage — Ed.]

· Include affordable apartments in their buildings [pure inclusionary zoning — Ed.]

· Buy city-issued certificates from developers of affordable housing that allow them to pay lower property taxes. [Transferable real estate tax abatement linkage — Ed.]

 

New York City has for decades taken inclusionary zoning one step further, via air rights. Built on granite, Manhattan has led the world in going up, so zoning applies not just to the ground but also to how high the skyscraper. With that bedrock foundation, the sky’s the limit … so permission to build up more stories has value. Conversely, those who for one reason or another limit their buildings’ height through a deed restriction gain air rights, which the City has found a way to monetize and thus to transmute into additional affordability:

 

The beige-brick luxury building, called the Ivy Tower, is seven stories taller than it would have been had its developers not agreed to help finance the gut rehabilitation of those century-old buildings at the northwest corner of 52nd Street and 10th Avenue - creating 27 apartments for lower-income people.

The developers of the Ivy Tower benefited by getting 42 additional units, with rents ranging from $1,850 for a studio to $6,500 for a penthouse.

 

The developers got more money. The city got more affordability. The island of Manhattan became more dense. That’s the symbiosis.

 

C. Where it works

By definition, inclusionary zoning operates in jurisdictions that require approval before development. Beyond that legal requirement, which applies almost everywhere in America, there’s a further economic condition: inclusionary zoning works only when zoned land has substantial value above unzoned land. Because land value is a residual, inclusionary zoning is economically potent in landlocked urban communities, preferably those sustaining economic growth — precisely the fact pattern where housing affordability is most expensive and thus most valuable.

 

[Shaun Donovan, commissioner of the City’s Department of Housing Preservation and Development, HPD], expects that 30,000 units will be built in the next few years in the recently rezoned areas of Brooklyn and on Manhattan’s West Side. “Using our new inclusionary program, which is the most aggressive in the country, along with city-owned land and other incentives [including soft debt and soft equity– Ed.],” he said, “we expect 8,500 of those units to be affordable.”

 

In East New York, Adrienne Brockington with her daughter Brianne Williams (in her arms), grandniece Shadina Brockington and daughter Princess McAllister. Her development was financed in part through the sale of tax credits to luxury developers.

 

… and where it doesn’t work

 

Inclusionary zoning doesn’t work where there is no zoning, because without zoning government never gets to the closing table.

Houston need not apply!

 

Nor does it work when metropoli can readily expand and vacant land is amply available.

Hands up, Phoenix, forget it!

 

Nor does it work when the economy is stagnant or declining.

Sorry Butch, no point in inclusionary zoning in the Hole in the Wall

 

Nor when the population is declining or dispersing.

No value benefit from rezoning here

 

But not coincidentally, places where inclusionary zoning doesn’t work tend to have plenty of conventionally affordable housing.

 

Would it work in New New Orleans?

Not in Under New Orleans, because that land has negative value (it will cost more money to clear and clean than it will be worth ready for development). It will work in Over New Orleans, especially if in addition to the natural advantages those areas are designated as enterprise or redevelopment zones.

 

Why does it work? That’s the subject for Part 2, coming tomorrow.

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